Medley LLC 6.875% Senior Notes

Ticker: MDLX, Buy below $25.

Why I Would Buy

  1. Yield – These notes (baby bonds) yield 6.875%! Despite the high yield they are relatively safe.
  2. Investment grade credit rating – The issuer Medley LLC has been rated “A-” by Egan-Jones Rating Company.
  3. Below Par – The baby bond  has a face value of $25 but currently trades below that, creating an opportunity for capital gains.
  4. 3 Year Call Protection – These bonds cannot be called earlier than 8/15/2019.
  5. High Insider Holdings – Insiders hold about 75% of Medley LLC, making it unlikely that they would permit a default or bankruptcy.

What Could Go Wrong

  1. High Yield – 6+% yield is rather high for a safe bond, there could be risks here that I am missing.
  2. Credit Rating Agency –  The A- credit rating was issued by a smaller rating agency. Egan-Jones is not one of the top three rating agencies, however it is a Nationally Recognized Statistical Ratings Organization (NRSRO) just like the three more well known ones.

Disclosure: I am long MDLX, please read additional disclosures here before taking any action based on this post.

 

Daimler AG

daimler

Ticker: DDAIY, Buy below $80.

Why I Would Buy

  1. Cheap – Daimler trades at less than 9 times trailing earnings, 1.3 times book and below 0.5 times trailing sales!
  2. Generous R&D Spend – Daimler consistently spends between 4 to 5% of revenues on research and development. In 2015 this amounted to an astounding 6.5 billion Euros.
2011 2012 2013 2014 2015
5.3% 4.9% 4.7% 4.4% 4.4%
  1. Strong Returns on Equity –Daimler  has posted impressive RoE numbers:
2011 2012 2013 2014 2015
14.6% 17.4% 20.1% 16.4% 15.9%
  1. High Investment Grade Credit Ratings – Daimler enjoys strong credit ratings on its long-term debt (S&P: A-, Moody’s: A3, Fitch: A-).   
  2. Low Payout – Despite a dividend greater than 5%, the payout ratio is at about 40%.

What Could Go Wrong

  1. Poor Cash Flow – The company has surprisingly been negative free cash flow for the past 5 years. The poor cash flow generation is exemplified by it’s operating cash flow in 2015: it was a miniscule 222 million Euros earned on revenues of 149+ billion Euros!
  2. High Beta – Despite having a diversified product line (the ubiquitous Freightliner trucks for example are a part of Daimler’s offerings), a majority of profits are derived from its luxury car business. Luxury vehicle sales tend to suffer during economic downturns; for instance during the financial crisis in 2008 Daimler’s profits cratered and in 2009 it reported a loss.

Disclosure: I am long DDAIY, please read additional disclosures here before taking any action based on this post.

First Guaranty Bancshares

FGBI

Ticker: FGBI, Buy below $18.

Why I Would Buy

  1. Very Cheap – First Guaranty trades at about 8 times trailing earnings. Other than being an obscure microcap stock, there isn’t anything else that I could find to explain this cheapness.
  2. Significant Insider Holding – About a third of the shares are held by management and directors.
  3. Recent Insider Buying – During the past 12 months 600,000 shares were purchased by company insiders, no significant sales were reported.
  4. Strong Returns on Equity – RoE is one of my favorite metrics for evaluating company performance, First Guaranty has posted some impressive numbers: 
    20112012201320142015
    7.37%10.90%9.31%11.40%12.98%
  5. Low Payout – Despite a healthy dividend of approximately 4%, the payout ratio is just 30%.

What Could Go Wrong

  1. Tiny –First Guaranty had a 2015 net income of $just 14.5 million and a market capitalization of about $120 million. Domiciled in Louisiana, it is the only the 7th largest bank in the state.
  2. Revenue PlateauRevenues have been flat for some years:
    20112012201320142015
    $51 mill$53 mill$47 mill$50 mill$56 mill
  3. Mediocre Safety/Stability Rating –First Guaranty is rated only 3 stars (out of a possible 5) by BankRate.com’s “Safe & Sound” bank ratings system.

Please read disclosure here before taking any action based on this post.

Jardine Matheson

Jardines

Ticker: JMHLY, Buy below $60.

Why I Would Buy

  1. Access To High Growth Markets – Jardine Matheson is a conglomerate that operates businesses in South-East Asian markets such as Indonesia, Singapore, Hong Kong etc. Newer investments are in hard-to-access, hyper-growth countries such as Myanmar and Vietnam.
  2. Astute Capital Allocation – Management has displayed strong skills at initiating and expanding ownership in businesses at extremely opportune times. Examples include: scooping up a 50% stake in Indonesia based Astra during the Asian financial crisis, and entering into joint ventures in Myanmar at the first sign of market liberalization there.
  3. Diversified Business Mix – The mix of businesses under the Jardine umbrella are awe-inspiring: real-estate, auto dealerships, hotels, restaurants, palm oil plantations, construction, engineering and more.
  4. Strong Returns on Equity – Jardine Matheson has averaged an impressive 11+% RoE during the past 5 years. Although there are signs of a slow down at Indonesia based Astra, their recent forays into Thailand and Myanmar shows potential for maintaining the high returns.
  5. Fair Price – The Company trades at about 12 times earnings and 1.1 times book.

What Could Go Wrong

  1. Convoluted Shareholding Structure –The conglomerate has a puzzling shareholding structure: Jardine Matheson holds ownership in many of its underlying business via a 83% stake in an intermediate holding company called Jardine Strategic. Jardine Strategic in turn holds a 56% stake in it’s parent Jardine Matheson! Look at the graphic below to see this strange looped shareholding:JardinesComplexHoldings
  2. Dynastic LeadershipThe Company is run by a single family – the Keswicks. The family projects a controlling influence over this conglomerate although it possess only 14% of voting rights. Jardine Matheson does not have professional management, rather the senior-most leadership is dynastic and is derived entirely from the Keswick family.
  3. Currency Risk –JM transacts business in various South-East Asian currencies, these are emerging market currencies and could move in any direction or degree relative to the USD.

Please read disclosure here before taking any action based on this post.

CK Hutchinson Holdings Limited

CKHoldings

Ticker: CKHUY, Buy below $15.

Why I Would Buy

  1. Cash Flow Generation – A hard to replicate collection of cash-flow generating assets such as ports, utilities, telecom, infrastructure assets, retail stores and more.
  2. Global Diversification – Revenues are generated from a highly diversified geographical base, reducing concentration and currency risks:CKRevenues
  3. Large Insider Holding – Legendary investor Li Ka-Shing and his family owns approximately 60% of the company. Minority shareholders can benefit by aligning themselves with the family’s interests.
  4. Strong Ratings Consensus – According to The Financial Times, of the 15 analysts covering CK Hutchison 7 held “Buy” opinion and 8 had “Outperform” opinion. None had a “Hold” rating or below.
  5. Extremely Cheap – Trades at about 17% discount to book and at about 7.3 times 2015 earnings.

What Could Go Wrong

  1. Large Beta –Ports and infrastructure businesses are strongly correlated with global trade volumes and the world economy. Even a mild recession could hit earnings hard.
  2. Capital Intensive BusinessesCK Hutchison operates capital hungry businesses such as ports, infrastructure, railroads, utilities etc. The large recurring capital expenditures can be a drag on returns-on-equity.
  3. Persona –CK Holdings is run by the highly-skilled investor Mr. Li Ka-Shing, the company benefits greatly from his tremendous business acumen; Mr. Li is 87.

Please read disclosure here before taking any action based on this post.

MTS Systems


mts_logo

Ticker: MTSC, Buy below $50.

Why I Would Buy

  1. Insider Buying – Strong insider buying from open markets by directors and officers during the past 3 months. Additionally, no open market sales were made by insiders during the last 12 months.
  2. Niche Market and Longevity – MTS Systems operates in a niche market (testing and sensing technologies), and has survived as a strong player for 50+ years.
  3. Small Cap – MTS System’s market capitalization is a shade over $800 million. Smaller cap companies such as MTS tend to grow faster than large cap ones, and are more likely to be acquired at a premium.
  4. Healthy R&D Spend – MTS has consistently spent about 4% of revenues on R&D. This increases the odds of them being able to maintain and grow market share:
    2012201320142015
    4.04%4.01%4.23%4.20%
  5. Strong Returns on Equity – In excess of 15% annually in recent years, this is an excellent performance:
    20112012201320142015
    27.03%23.56%23.92%16.32%17.61%

What Could Go Wrong

  1. Potential Accounting Concern – MTS’s most recent 10K filing contains the following opinion by their auditors :”MTS Systems Corporation has not maintained effective internal control over financial reporting as of October 3, 2015″. The CEO has acknowledged this weakness and has promised remedial measures. Regardless, this is something potential investors need to keep an eye on.
  2. Declining Profitability – Operating Income has been on a decline despite revenues staying relatively steady, this could be an indication of increased competitive pressures:
     201320142015
    Revenue569564564
    Operating Profit806061
    (in millions)
  3. Recent Large Acquisition – MTS recently announced a very large acquisition: $580 million purchase of PCB group. This deal is to be funded largely via debt, this new leverage adds risks to the capital structure. Additionally, as in any acquisition the synergies may not be realized.

Please read disclosure here before taking any action based on this post.

Gilead Sciences

Gilead_Sciences_Logo_svg

Ticker: GILD, Buy below $90.

Why I Would Buy

  1. Extremely Cheap – Trades at less than 8 times forward price-earnings ratio.
  2. Strong Ratings Consensus – S&P 5 stars, Fool.com 5 stars, Morningstar 5 stars.
  3. Tremendous Returns on Equity – Greater than 25% RoE for each of the past 5 years:

20112012201320142015
44.49%32.30%29.74%90.32%106.64%

  1. Outsized R&D Spend Gilead has consistently spent a very large percent of revenues on R&D. High R&D spending correlates to strong future growth rates:

20112012201320142015
14.66%18.14%18.92%11.47%9.23%

  1. Miniscule Dividend Payout Ratio At less than 10% of earnings, this is an unbelievable metric for a stock yielding more than 2%.

What Could Go Wrong

  1. Reversion to Mean – Revenues are up an astounding 300% during past 3 years; this is a highly anomalous growth rate. Such aberrant growth rates can skew valuation metrics and probably create an illusion of value where one may not exist.
  2. Revenue Concentration Most of the revenue growth came from HCV (Liver disease) medications, which went from near 0% revenue contribution in 2013 to more than 50% in 2015. Merck and other players are beginning to prey upon on this monopoly that Gilead has been enjoying.
  3. Market Wisdom – Market has beaten this stock down to ridiculous valuations — the wisdom of the crowds cannot be dismissed lightly.

Please read disclosure here before taking any action based on this post.